Important note

Social security: means testing the family home for aged care residents

Social security: means testing the family home for aged care residents

Strategies

Tuesday 11 October 2016

Age pensioners moving into aged care from 1 January 2017 may see a reduction in their pension entitlements following a recent legislative change to the social security means testing arrangements for the family home. The new legislation removes the income and assets test exemptions that are available in certain circumstances for an age pensioner’s former home where they move into aged care. When combined with changes to the assets test which also apply from 1 January 2017, some elderly clients moving into aged care may lose their age pension entitlement altogether. This summary outlines some of the key advice considerations for financial services professionals assisting elderly clients and their families with a move into aged care.

The new legislation removes the income and assets test exemptions that are available in certain circumstances for an age pensioner’s former home

Removal of rental income exemption

Currently, where an age pensioner moves into residential aged care, any rental income received from leasing out their former home is not assessable under the pension income test where the pensioner pays all or part of their accommodation costs by periodic payment. This exemption will be removed for new aged care residents from 1 January 2017.

The removal of the income test exemption means that rent received (less allowable deductions) from an age pensioner’s former home will generally be assessable income for those pensioners entering aged care from 1 January 2017, regardless of how their accommodation costs are paid. This will increase the amount of income that is assessable for some age pensioners, potentially resulting in an age pension entitlement that is significantly less than it would have otherwise been if they had entered care prior to 1 January 2017. For example, an individual with other assessable income of $4,500 who rents out their former home, could see their age pension decrease by 50 cents for every $1.00 of net rental income assessed.

For age pensioners who enter care prior to 1 January 2017, rental income from their former home will continue to be exempt where they are paying all or part of their accommodation costs by periodic payments. However, existing residents who leave care for 28 days or more and re-enter care after 1 January 2017 will no longer be eligible for the rental income exemption.

In deciding whether an individual’s former home should be rented out, consideration should also be given to the impact of rental income on their aged care means tested fee. The net rent assessed will increase the amount included in the income test component of the means tested fee calculation, however this may be offset in part by any reduction in the level of age pension as a result of the new rules.

In deciding whether an individual’s former home should be rented out, consideration should also be given to the impact of rental income on their aged care means tested fee.

If the individual’s former home is not rented out, no income from the property will be counted under the pension income test or for aged care means testing.

Removal of assets test exemption

Under the social security assets test, if an individual vacates their home to enter a care situation, the home generally continues to be treated as the person’s principal residence and is an exempt asset for two years from the time of entering care. If, after two years, the individual has not returned to their home, it may continue to be an exempt asset if either:

their partner occupies the property, or

the property is rented out and the individual is paying all or part of their aged care accommodation costs by periodic payment.

From 1 January 2017 the indefinite assets test exemption, which is available where the property is rented and accommodation costs are paid periodically, will also be removed. The home will continue to be an exempt asset where it is occupied by the person’s partner.

The removal of this assets test exemption means that the value of an age pensioner’s former home will generally be assessed as an asset for those age pensioners entering aged care from 1 January 2017 regardless of how their accommodation costs are paid. While the two year exemption will continue to apply, at the end of this two year period, the amount of assets that are assessable for some age pensioners will significantly increase due to the inclusion of their former home.

Where the home becomes assessable, the individual will be treated as a non-homeowner from a social security perspective. While impacted age pensioners will have access to the higher assets test thresholds for non-homeowners, some individuals may see their age pension entitlement substantially reduced, depending on the value of their property. For example, if a single age pensioner’s assessable assets (including their home) exceed $450,000, their age pension will decrease by $78.00 per year (an increase from $39.00 per year before 1 January 2017) for every $1,000 of assets above this threshold.

The assets test cut-out thresholds are also legislated to be reduced on 1 January 2017. For a single non-homeowner, this means that no pension will be payable where total assessed assets exceed $742,500.

Example

Eliza, age 80, is a widow and currently lives on her own.

She has secured a place at an aged care facility which requires an accommodation payment of $400,000. Her only assets are the family home which is valued at $700,000, personal effects of $10,000 and a bank account of $150,000. She receives the full age pension – currently $22,805 per annum (as at 20 September 2016).

Eliza would like to keep her home and is considering renting it out to assist in meeting her aged care fees. It is estimated the property could be rented for $500 per week (after allowable deductions).

Move into care prior to 1 January 2017

If Eliza moved into aged care prior to 1 January 2017 and elected to pay part of her accommodation costs by daily accommodation payments, the rental income from her former home would not be assessable income under the age pension income test. The value of her home would also be excluded indefinitely from the assets test.

Assuming Eliza makes an upfront payment of $100,000 towards her accommodation costs, she would continue to be eligible for the maximum age pension. This is calculated as follows:

Assets/Income

Assets

Assessed assets

Assessed income

Pre-care

At entry

Cash

$150,000

$50,000

$50,000

$887

Home

$700,000

$700,000

-

-

Personal effects

$10,000

$10,000

$10,000

-

Accommodation deposit

-

$100,000

-

-

Total

$860,000

$860,000

$60,000

$887

Reduction amount

$0

$0

Age pension entitlement

$22,805 per annum

Assets/Income

Assets - Pre-care

Cash

$150,000

Home

$700,000

Personal effects

$10,000

Accommodation deposit

-

Total

$860,000

Assets/Income

Assets - At entry

Cash

$50,000

Home

$700,000

Personal effects

$10,000

Accommodation deposit

$100,000

Total

$860,000

Assets/Income

Assessed assets

Cash

$50,000

Home

-

Personal effects

$10,000

Accommodation deposit

-

Total

$60,000

Assets/Income

Assessed income

Cash

$887

Home

-

Personal effects

-

Accommodation deposit

-

Total

$887

Reduction amount - Assessed assets

$0

Reduction amount - Assessed income

$0

Age pension entitlement

$22,805 per annum

Move into care after 1 January 2017

If Eliza moves into care on or after 1 January 2017, the rental income from her former home will be assessable income under the age pension income test, regardless of whether she pays her accommodation costs upfront or via periodic payments. Her home will also be an assessable asset after two years.

If Eliza makes an upfront payment of $100,000 towards her accommodation costs, her age pension entitlement would be reduced to $11,493 per annum. This is calculated as follows:

Alternatively, if Eliza decided to retain her home and not rent it out, then she would not be initially impacted by this change, as there would be no rental income assessed under the income test. However, in doing so, she would forego any additional income generated from the property, which could have otherwise been used to assist in meeting her living expenses or cost of her aged care.

Regardless of whether the property is rented or vacant, the value of Eliza’s home will be assessed after two years. Given the value of her home, her assets are likely to exceed the assets test cut-out threshold and she will lose her age pension entitlement altogether.

The advice opportunity

Helping an elderly client and their family decide what to do with their former home after they move into aged care involves consideration of a number of factors. There are a range of emotional and practical reasons why an individual may prefer to retain their home and keep it vacant or rent it out. However, it is important for individuals to be aware of the financial implications of their decision on both their aged care fees and age pension entitlement, particularly following the removal of the age pension means testing exemptions and changes to the assets test that apply from 1 January 2017.

There may be merit in retaining the former home, as it will continue to be an exempt asset for two years from a social security perspective. From an aged care means testing perspective, the amount of the property that is assessed as an asset is also capped, meaning that total assessed assets may be lower than if the property was sold and the proceeds otherwise invested. However, these benefits should be weighed up against the potential costs involved in maintaining the property and also the cash flow needs of the individual moving into care.

Further information

For the latest age pension and aged care rates and thresholds see the Macquarie Big Black Book

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1 The value of the former home is exempt under the assets test for a period of two years.

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